Accrual Management to Meet Earnings Targets: Did Cadbury Make a Difference?

WP 99/008

43 Pages Posted: 15 Jun 1999

See all articles by Ken V. Peasnell

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Steven Young

Lancaster University - Department of Accounting and Finance

Date Written: March 1999

Abstract

This paper examines the association between the composition of the board of directors and earnings management activity for a period spanning the publication of the Cadbury Report (1992). Central to both the Cadbury Committee?s initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play a key role in ensuring the quality and reliability of published financial statements. We evaluate the impact of the Cadbury Report by testing for evidence of income-increasing abnormal accruals when unmanaged earnings undershoot target earnings and whether outside directors help constrain such activity. Our results provide evidence of accrual management to meet earnings targets in both the pre- and post-Cadbury periods. However, while we find no evidence of an association between the degree of accrual management and the composition of the board of directors in the pre-Cadbury period, results for the post-Cadbury period indicate less income-increasing accrual management to avoid earnings losses or earnings declines when the proportion of non-executive directors is high. These results are consistent with the view that appropriately structured boards are discharging their financial reporting duties more effectively post-Cadbury.

JEL Classification: M41, M43, G34

Suggested Citation

Peasnell, Kenneth V. and Pope, Peter F. and Young, Steven, Accrual Management to Meet Earnings Targets: Did Cadbury Make a Difference? (March 1999). WP 99/008, Available at SSRN: https://ssrn.com/abstract=163990 or http://dx.doi.org/10.2139/ssrn.163990

Kenneth V. Peasnell (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Peter F. Pope

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Steven Young

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

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